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Economic Insight

UK Business Confidence Monitor: National

An authoritative and authentic check on the nation’s economic pulse, Q4 2020.

The latest ICAEW Business Confidence Monitor (BCM) shows how business’s confidence and performance are affected by coronavirus and the challenges they are facing.

The results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions, and company sizes, ensuring a representative picture of the UK economy. The interviewing is continuous, the latest findings are based on the period between 20 July and 19 October 2020.

  • The Business Confidence Index is firmly in negative territory, reflecting the coronavirus pandemic and, for many businesses perhaps, the impending end of the EU transition arrangements. 
  • Businesses face extremely difficult sales conditions. Export and domestic sales are well below a year ago. Transport, Construction, Manufacturing and Retail are among the worst hit sectors, while Finance, Utilities and IT are faring slightly better than the UK average.
  • The sectors with the weakest confidence are Property, Transport and IT, with the latter probably reflecting increased market competition, as firms from other sectors seek to enter the digital space. Business confidence is lowest in London, reflecting the importance of these sectors to the capital.
  • There are no significant variations by company size, despite worries that small and medium-sized businesses might be particularly badly hit. If anything, UK quoted companies have the weakest confidence, perhaps reflecting the global nature of the pandemic.
  • Challenges have, however, grown markedly. Customer demand is an increasing challenge for over half of all companies, and late payment is a rising difficulty for a third. Other growing concerns include problems with transport and the ability to expand into new areas.
  • Stock levels are high by the standards of the last decade, although still lower than in Q4 2019, reflecting lack of sales but also probably the impending end of the transitionary trade arrangements with the EU.

Confidence overall

Amid enormous uncertainties, confidence is firmly in negative territory

  • Confidence is substantially negative, reflecting the extraordinary circumstances of 2020
  • However, it was much lower in the global financial crisis, when it recovered strongly
  • Many European countries, including the UK, are now seeing surges in COVID-19 cases, with governments imposing new restrictions in response. Nevertheless, 2021 should see the global economy at least partially recover, and the global health crisis come under some degree of control
  • Confidence is similar to a year ago, when Brexit was the main concern
  • Confidence is particularly low in the Property, Transport and IT sectors and in London

UK Business Confidence Index

The Business Confidence Index is deeply in negative territory, reflecting the extraordinary circumstances of 2020 and the uncertainties that lie ahead. However, confidence was much lower in early 2009 after the global financial crisis, and it then recovered very strongly during the course of that year. Indeed, by the end of 2009 the index was clearly back in positive territory, as governments around the world provided support to their economies. A similar policy response has occurred this year, with governments around the world providing support to both businesses and individuals. More recently, the number of COVID-19 cases has started to rise again in many European countries including the UK, and has continued to grow in the US. As a result, many restrictions have been reintroduced or tightened. However, it is still very possible that 2021 will experience improving confidence among UK businesses, as the domestic and global economies at least partially recover, and as the health crisis gradually comes under control.

It is striking that, at -19.0, the current level of the Confidence Index is similar to the very low level of Q4 2019, when businesses faced uncertainty over both the general election and the possibility of the UK leaving the EU without a trade deal. With the transition period now about to end, the prospect of there not being a deal may have, once again, damaged confidence for many businesses, adding to the pressures caused by the COVID-19 crisis. Confidence is particularly low in the Property, Transport & Storage and IT & Communications sectors and ‒ perhaps related to that ‒ in London.

GDP

GDP is rising after its collapse earlier in the year, but it has much ground to recover

  • The first half of 2020 saw the largest decline in UK GDP on record. Q2 was 22% lower than Q4 2019
  • This was also a larger fall than in most other major economies
  • April probably saw the lowest point in terms of GDP growth
  • The furlough scheme has been important, protecting jobs and household incomes; other measures have supported individual sectors
  • There are concerns now about the ‘second wave’ of infections. Lockdowns and restrictions have been introduced in all parts of the UK
  • The furlough scheme has also been extended and other support measures introduced
  • In 2021, much will depend on how quickly vaccines can be developed and made available

UK GDP, quarterly growth

The UK economy was growing slowly when the coronavirus pandemic hit. The first half of 2020 then saw the largest decline in UK GDP on record, with the Q2 level being 22% lower than that of Q4 2019. This was also a larger fall than in any other major economy except for Spain, partly reflecting more stringent and longer-lasting lockdown measures in the UK than in many countries, and partly reflecting the importance to the UK of service sectors such as transport, tourism, culture and hospitality, that have been especially heavily impacted by the crisis. However, April probably saw the lowest point in terms of GDP growth, and since then total output in the economy has been rising, initially very fast as lockdown was lifted, but in the third quarter somewhat more slowly. Even so, in August, UK GDP was still 9.2% below its level in February 2020, before the full impact of the coronavirus pandemic.

Within the overall picture, the furlough scheme was particularly important at protecting jobs and household incomes, and there was also a variety of measures aimed at giving specific protection to, or in some cases boosts to, individual sectors. This helped to prevent a damaging downward spiral of weaker output leading to large job cuts and then lower spending and further decreases in output and job cuts. Consumer spending fell much more than household incomes, partly because some items and services were not available to buy, but also because of damaged confidence. 

Most recently there has been a ‘second wave’ of infections in the UK and several other European economies. Restrictions on behaviour have been tightened, including a one-month lockdown in England. Another dip in in Q4 GDP is likely, after the Q3 rebound, although it will probably be much less severe than in Q2.The furlough scheme was due to end but has been extended to March 2021, and other forms of support are being provided. On balance a partial recovery in 2021 remains very likely, although much will depend on how quickly a vaccine or vaccines can be developed, and also how widely they will be made available.

Sales

Sales are generally down on a year ago, but with some large variations by sector

  • Exports and domestic sales are well below a year ago. These are the first falls in sales since the global financial crisis
  • Among the worst-hit sectors are Transport, Construction, Manufacturing and Retail
  • A few sectors report higher sales: Finance, Utilities and IT
  • Profits are well below their level this time last year. Companies have had to restrain price rises 
  • Expectations are for better performance over the year ahead, for domestic and export sales, and profits

Domestic sales and export growth – average % change

Although the UK economy has been on a growth path since about May, companies still report that their exports and especially their domestic sales are well below where they were a year ago, in Q4 2019 (falls of -1.0% and -2.2% respectively). These are the first declines since the global financial crisis a decade ago, and the fact that both domestic and international sales are down simultaneously reflects the fact that, once again, the crisis is a global one. Among the worst-hit sectors are Transport & Storage, Construction, Manufacturing and Retail & Wholesale, although it is likely that within those, there are substantial variations by sub-sector. At the same time, a few sectors report higher sales: Banking, Finance & Insurance, Energy, Water & Mining, and IT & Communications.

Weaker sales overall feed into profits, which are 4.0% below their level this time last year. And companies have had to restrain price rises, so these are only a marginal 0.2% higher than they were a year ago, whereas input prices are 1.0% higher. Average salaries are around the same level as in Q4 2019, although in many cases people are likely to have spent some time furloughed or on short-time working. Looking forward, however, the expectations are for better performance over the year ahead, with companies anticipating modest increases of 2.5% and 2.0% in their domestic and export sales, helping to support a small profit rise of 1.8%.

Business challenges

Customer demand and late payments are widespread growing business challenges

  • Customer demand is an increasing challenge for over half of all companies
  • Late payment from customers is a rising concern for a third of businesses
  • Other challenges that have grown rapidly are transport problems and the ability to expand into new areas 
  • Regulatory requirements are less widely cited as a matter of growing concern than a year ago
  • The pandemic has probably made it harder for companies to focus on preparing for the end of the transitionary arrangement with the EU

Factors seen as a growing challenge to business performance compared to 12 months ago

The coronavirus pandemic has created major challenges for businesses. Customer demand is now a growing challenge for over half of all companies: 52% compared with 37% a year ago, and the highest figure since Q2 2009. But no less striking is that late payment from customers is an increasing problem for over a third (34%) of businesses, so dramatically up on the 18% of a year ago. This is a clear indication that many customers are in financial distress, and are having to pay their bills slowly, or in some cases are unable to pay them at all. 

Two other factors that have grown rapidly in importance are transport problems and the ability to expand into new areas. It’s likely that these reflect how lockdowns and similar measures, both domestically and internationally, have affected the ability of companies to service existing markets and ‒ probably more so ‒ break into new ones. In addition, many businesses will have seen additional costs in terms of, for example, providing safe conditions for customers and staff, and it is notable that ‘non-transport factors’ have become more widespread as a growing challenge. The COVID-19 crisis has possibly made it very difficult for many companies to devote their full attention to preparing for new trade and other regulatory arrangements when the transitionary arrangements between the UK and the EU end at the beginning of January. More positively, regulatory requirements have become less widely cited as a rising challenge for businesses, although concerns remain widespread.

Employment and investment

Employment and investment are down and not expected to grow in 2021

  • Companies have cut employee numbers, to a level slightly below Q4 2019
  • The decline would have been far more severe without the support of the furlough scheme 
  • New government support measures have been announced, but the future path of employment is currently very uncertain. Employers expect little rise over the next 12 months 
  • The furloughing of staff does not seem to have exacerbated skills shortages
  • Investment is also down and expected to increase only modestly in the year ahead

Number of employees – average % change, and availability of non-management and management skills

Faced with declining sales and profits, growing problems such as late payments and great uncertainty about business conditions, companies have cut their costs. They have reduced their employment numbers, to a level 0.5% below Q4 2019. It is likely that the cuts would have been far more severe without support from the government’s Coronavirus Job Retention Scheme. That scheme was especially important during lockdown in the hospitality, culture and leisure sectors, and also in the construction sector among others, although the majority of employees were able to return to ‘normal’ working by late summer, once restrictions were relaxed.

Most recently, restrictions on businesses have been re-imposed, notably but not only a month-long lockdown in England, with similar measures also in place in the rest of the UK. So although employers, on average, expect that over the next 12 months their headcount will rise by only 0.2%, there must be great uncertainty attached to this. There is also great variation across sectors, with some expecting to see further declines even before the new measures were introduced. 

The furloughing of staff earlier in 2020 did not seem to have exacerbated skills shortages relating to the availability of either management or non-management skills, probably because the demand for skills was eased somewhat by companies facing less competition in the marketplace, and weaker demand generally. The furlough scheme has now been extended until March 2021, and this will clearly provide some support to employment levels.

Investment is also down, with capital spending 0.5% lower than a year ago, and expected to increase by 0.9% in the year ahead. Here too, however, the degree of uncertainty felt by businesses is doubtless very great.

Stock levels

High levels of stocks reflect the coronavirus crisis and anxieties over EU trade

  • Stock levels are high compared to most of the last decade, but not as high as in Q4 2019 
  • A major explanation is weak demand, which has outweighed any difficulties businesses might have had producing output, due to office or factory closures 
  • However, another likely factor tending to drive up stock levels is the impending end of the transitionary trade arrangements between the UK and the EU

Stock levels above normal levels

Compared to much of the last decade, stock levels are high in Manufacturing, Construction, Transport & Storage and Retail & Wholesale, although not as high as in Q4 2019. This is true not just for finished goods but also for work in progress, and for raw materials and components ‒ the proportions of businesses saying that stock levels are above normal are 65%, 25% and 37% in each case. Clearly, a major explanation is that demand is so weak, and in some cases there may also be logistical barriers to meeting demand, such as availability of transport. On balance these factors have clearly outweighed the potential problem of companies not meeting demand due to factory/office closures and the non-availability or even loss of their staff.

Completely separately, however, another factor tending to drive up stock levels is probably the impending end of the transitionary trade arrangements between the UK and the EU. A year ago stock levels were even higher than they are now, as the UK’s departure from the EU approached, and as companies feared disruption caused by an absence of a trade deal. That process is now repeating. The fact that stocks have not risen quite so high is likely to be due to a mixture of greater pessimism over sales prospects, companies not having the financial strength to carry large stock levels, and the challenge of COVID-19 having made it hard for companies to spare the management resources needed to prepare fully for the end of the transition period.

Confidence by sector

Transport has been very badly hit by the pandemic. The IT sector has other worries

  • Sectors with the weakest confidence compared with a year ago are Property and Transport 
  • The latter also has the weakest sales, both export and domestic, and the most amount of spare capacity 
  • Also suffering have been Construction, Manufacturing and Retail, although much more so for domestic than for export sales
  • Within all of these sectors there are likely to have been some marked variations 
  • Banking & Finance has seen modest growth in both domestic and export sales
  • So has IT, and yet it is among the least confident, reflecting increased market competition as firms from other sectors seek to enter the digital space

UK business confidence index by sector

The sectors with the weakest confidence in the current quarter compared with a year ago are Property, and Transport & Storage. The latter also has the weakest sales, both export and domestic, and the most spare capacity. Airlines have been hit especially hard by the pandemic, with almost all flights initially suspended and only a small proportion reinstated ‒ and with average payloads well down, even for those that do operate. Other public transport services such as buses, tubes and trains have also been badly affected. Also suffering have been Construction, Manufacturing and Retail & Wholesale, although much more so for domestic than for export sales. Within each sector there are likely to have been some marked variations, with, for example, continuing growth in both food manufacturing and food retailing, and also online retailing, while other elements have been very badly hit.

Two broad sectors have seen modest growth in both domestic and export sales. One is Banking, Insurance & Finance, where the banks have, on the whole, been providing businesses (and some households) with additional loans to support them during the economic crisis. The other is IT & Communications, which has seen an uptick in demand for its services. Despite that, the sector is among the least confident. Customer demand is a growing challenge for 54% of businesses in the sector, up sharply from 35% a year ago, suggesting that the sector is impacted indirectly via their clients who have been affected by coronavirus. Competition in the marketplace is a more widespread concern in IT & Communications than in most sectors as firms from other sectors move to the digital space.

Confidence by region and nation

Confidence is in negative territory everywhere, headed by London

  • Businesses in all regions and nations say that they are less confident about business conditions in the year ahead, than in the past 12 months
  • Confidence is lowest in London, reflecting the importance of the IT & Communications and Property sectors and the fact that London’s transport sector has been badly hit
  • The East Midlands has seen the largest fall in domestic sales, but with the North of England and North West not far behind 
  • There is some sense of a ‘north-south’ divide apparent in terms of domestic sales, and also exports, for which the East and West Midlands have seen the largest declines 
  • The East Midlands has also seen the second-largest fall in employment, with only Wales having experienced more job losses 

UK business confidence index by region and nation

Businesses in all regions and nations say that they are less confident about business conditions in the year ahead, compared with the past 12 months. Confidence is lowest in London, which probably reflects the importance of the IT & Communications and Property sectors to the capital, and the fact that London’s transport sector has been so badly hit, not least the aviation element. Elsewhere, the East Midlands has seen the largest fall in domestic sales, but with the North West and the North of England not far behind. Indeed there is some sense of a ‘north-south’ divide in terms of domestic sales, with Wales, Yorkshire & Humberside and Scotland also seeing larger domestic sales declines than other parts of the country. For exports, the picture is similar, with the West Midlands seeing the largest decline, alongside its neighbour the East Midlands. In both cases the severe challenges facing the car industry will have been a contributory factor, along with a large slump in demand for aero-engines produced in the East Midlands. That region has also seen the second-largest fall in employment, with only Wales having experienced more job losses. Again, the aviation sector is part of the reason, reflecting the importance of aircraft maintenance and engineering work in Wales. Looking ahead, however, almost all regions expect at least some growth in the year ahead across almost all measures, although the recent tightening of restrictions will inevitably have some impact on that.

Confidence by business size

Businesses large and small, privately owned and quoted, all share the pain

  • Despite some expectations to the contrary, the situation of small and medium-sized companies (SMEs) seems, on average, no worse than that of larger companies
  • That is true for late payments, access to capital and the incidence of below-capacity working
  • The biggest variation in confidence is between large privately-owned businesses and UK listed companies, with the latter more pessimistic 
  • In terms of sales, listed UK companies are seeing the sharpest falls in both domestic sales and exports across all different company sizes 
  • In the year ahead, growth in domestic sales and exports is expected to rebound across all company sizes, although the recent tightening of government restrictions may make that more challenging

UK business confidence index by company size

A major source of concern during the early stages of the pandemic was that SMEs might be particularly exposed to the downturn in activity, due to weaker finances and fewer opportunities for raising capital. However, on several metrics such as whether or not late payments are a source of growing concern, or whether access to capital is becoming more challenging, or the scale of below-capacity working, the position of SMEs is broadly similar to that of larger companies. Where the Confidence Index is concerned, the biggest variation is between -12.1 for large (250+ staff) privately-owned businesses and -27.4 for UK listed companies. Several very large companies, such as airlines, have not just seen immediate challenges to their sales in 2020, but have also had their underlying business models brought into question by the pandemic. And in Q4 2020, listed UK companies are seeing the sharpest falls in both domestic sales and exports across all different company sizes as coronavirus continues to affect global economies. In the year ahead, growth in domestic sales and exports is expected to rebound across all company sizes, with projections by listed UK companies marginally the strongest. The introduction of a second lockdown in England, with similar restrictions in place elsewhere in the UK, is likely to make that harder to achieve, at least initially.

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Using BCM data

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